FINRA Defense for Failure to Supervise Allegations
Contents
You’ve Been Accused of Failure to Supervise – Now What?
So, you got hit with a failure to supervise allegation from FINRA. Take a deep breath – it’s not the end of the world, but you need to act fast. Here’s what you need to know.
Understanding the Allegation
First things first, let’s break down what this actually means. FINRA Rule 3110 requires firms to establish and maintain a supervisory system designed to ensure compliance with securities laws and regulations. 1Essentially, they‘re alleging your supervisory procedures were inadequate in preventing violations by employees under your watch. Common examples include:
- Failing to detect excessive trading or unsuitable recommendations
- Lack of oversight on outside business activities
- Insufficient annual compliance reviews
- Inadequate written supervisory procedures
The consequences? Potential fines, suspensions, or even a permanent bar from the industry. Not ideal, but also not a death sentence if you mount a strong defense. 1
Step 1: Don’t Panic, But Act Quickly
I get it, getting slapped with one of these can feel like a punch to the gut. But panicking and sticking your head in the sand is the last thing you want to do.The moment that letter arrives, the clock starts ticking. You typically have just a few weeks to respond to FINRA’s allegations in what’s called a “Wells Submission.” 2This is your first – and arguably most important – opportunity to present a vigorous defense. Blow it off or submit a weak response, and you’re essentially handing FINRA a win on a silver platter.So take a deep breath, and get your ducks in a row quickly. Line up an experienced FINRA defense attorney ASAP. They‘ll hit the ground running, guiding you through every step of the process while crafting a powerful Wells Submission.
Step 2: Gather Evidence & Build Your Case
With your legal team assembled, it’s time to construct an ironclad defense strategy. And that all starts with evidence gathering.Your attorneys will want to review every shred of documentation – trade records, client communications, compliance manuals, annual reviews, literally everything even remotely relevant. Leave no stone unturned in building your case file.They’ll also likely conduct interviews with key employees and supervisors to get sworn testimony supporting your position. Did you have robust written supervisory procedures in place? Can you show you provided regular training to staff? Did you take prompt remedial action when issues arose?All of this helps build a narrative that you exercised reasonable supervision, even if mistakes may have occurred. The goal? Demonstrate you had systems in place to comply with FINRA’s rules, even if they weren’t followed perfectly every single time.
Step 3: Consider All Potential Defenses
With the facts compiled, your legal team will then evaluate all possible avenues of defense based on the specific allegations.A few common defense strategies in failure to supervise cases:Lack of Red Flags
If no glaring red flags existed to put you on notice of misconduct, you may be able to argue reasonable supervision was exercised. Routine account reviews, for example, may not always detect complex trading violations.Prompt Remedial Action
Even if issues initially slipped through the cracks, you can highlight any prompt steps taken to investigate and address the matter once discovered. This shows good faith efforts at compliance.Advice of Counsel Defense
If you reasonably relied on experienced securities counsel in establishing your supervisory system, you may be able to deflect blame for any perceived shortcomings.Statute of Limitations
Depending on the timing of the alleged failures, you may be able to argue the claims are time-barred under FINRA’s codes and disciplinary procedures.The key? Presenting a focused, coherent defense narrative supported by strong evidence rather than throwing every possible argument against the wall. Your attorneys will strategize the most effective approach for your specific situation.
Step 4: The Wells Submission – Your First Chance to Convince
With your defense strategy mapped out, it‘s time for the main event – drafting a comprehensive Wells Submission.This document is essentially your first “brief” laying out the facts, supporting evidence, and legal arguments for why the allegations should be dismissed. It’s your opening salvo to persuade FINRA to drop the case entirely or at least reduce potential sanctions.Treat this like the make-or-break moment it is. A sloppy, halfhearted Wells Submission tanks your credibility right out of the gate. But a meticulously researched and forcefully argued defense can immediately shift the momentum in your favor.Your attorneys will spend countless hours crafting airtight legal arguments, analyzing relevant case precedents, and packaging the evidence in a way that methodically dismantles FINRA’s claims point-by-point.The goal? Undeniably demonstrate you had reasonable supervisory systems in place, made good faith efforts at compliance, and took appropriate remedial measures when issues arose. Argue why failure to supervise charges are unwarranted based on the specific facts of your situation.It’s a Herculean effort, but one that provides the best chance at a favorable outcome right out of the gates.
